Investors face an extremely challenging 2016 in terms of asset allocation with both bonds and equities showing no clear path , according to Mark Dampier (pictured), head of research at Hargreaves Lansdown, who adds however that he doesn’t expect being a bear to pay off.
With the year drawing to a close, markets are supremely focused on a ramp up in volatility ahead of the Federal Open Markets Committee meeting at 19:00 GMT today where many will expect an interest rate ‘lift off’ by the Federal Reserve.
The likely consequences of the first rates rise in nine years by the US central bank have been much discussed with some predicting that it will wreak havoc in both bond and equity markets.
While Dampier says he doesn’t trust a bearish outlook for the year ahead, the recent volatility in markets (shown in the graph below) makes deciding what to buy in terms of asset classes very problematic.
According to FE Analytics, the VIX index which measures volatility in the US equity market but is somewhat of a proxy for wider sentiment, has leaped up while both bonds and equities as well as gold have sold off in the past few weeks.
Performance of index over 2 weeks
Source: FE Analytics
He said: “Asset allocation is remarkably hard to do at any time but it is near impossible to do at the moment. It is so hard difficult for both private and professional investors to know what to do. Cash is still trash and people don’t what to hold much [cash] but it is very difficult to know what to buy.”
For ‘perma-bear’ managers such as JPM’s Bill Eigen, who heads a host of fixed income portfolios such as the JPM Income Opportunity fund, this has meant high cash weightings contributing to underperformance over the past year or so.
Performance of fund and sector over 1yr
Source: FE Analytics
Another big bear Hugh Hendry, manager of the CF Eclectica Absolute Macro fund made a volte face and turned uber bullish in 2013.
He warned recently that opting for a defensive positon could prove to be “very painful” next year, however the likes of Miton’s David Jane and Hawksmoor’s Jim Wood-Smith have struck a gloomier tone.
Dampier, says at some point the ‘perma-bears’ could be proved correct and the market could crash but that they have squarely got it wrong so far and so he is sceptical of this happening next year.
“If you think of all that stuff on interest rates and bonds and how it was all going to fall apart and just look how wrong everyone has been. This has put a lot of private investors off entirely,” he said.
“The pessimists have all the intellectual credibility yet strangely enough they have been completely and utterly wrong most of the time,” he added.
“That is not to say that they won’t be right one day but how clever is it to miss all the upside? If you really are good you get the bull market right and then you get the sell right and wait for the market to fall… but they don’t. It is a huge amount of upside they have missed out on, especially if you look small and mid-caps.”
According to FE Analytics, bond and equities markets have rallied with gold – which has traditionally been negatively correlated to sentiment – has fallen. In the UK, it has been especially profitable to be in mid and small caps over this period as the graph below shows.
Performance of indices since 2009
Source: FE Analytics
However, this year the equity market as measured by the FTSE All Share is down, the bonds are flat and gold has continued to lose value although the broader index has been supported by the smaller cap end of the market.
Performance of indices in 2015
Source: FE Analytics
Dampier said: “This market - from the recovery in 2009 - to now has been the most hated of all."
“That is because most people have kept on saying you should be out, so actually, the bears and the commentators who may eventually be right for all I know have done a great disservice because they have missed all the upside.”
He adds that he doesn’t expect rates to rise in the UK next year while if they do in the US, they are likely to come back down fairly swiftly.
“Interest rates won’t go up next in the UK and it is quite possible US rates will come down again and then after rising.”